##### 



ELECTRO RENT FINANCIAL HIGHLIGHTS
04
 May 31,(in thousands, except per share information)
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000REVENUES
    
    $
    94,110
    
    
    $
    108,796
    
    
    $
    147,864
    
    
    $
    211,176
    
    
    $
    241,793COSTS OF REVENUES AND DEPRECIATION
    
    
    44,778
    
    
    
    62,663
    
    
    
    81,678
    
    
    
    99,724
    
    
    
    131,125SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    32,207
    
    
    
    37,399
    
    
    
    50,492
    
    
    
    62,625
    
    
    
    65,104LOSS ON IMPAIRMENT OF GOODWILL AND INTANGIBLES
    
    
    
    
    
    
    37,135
    
    
    
    
    
    
    
    
    
    
    
    INTEREST AND OTHER, NET
    
    
    (1,335
    )
    
    
    (4,091
    )
    
    
    (2,232
    )
    
    
    (708
    )
    
    
    5,465INCOME (LOSS) BEFORE INCOME TAXES
    
    
    18,460
    
    
    
    (24,310
    )
    
    
    17,926
    
    
    
    49,535
    
    
    
    40,099INCOME TAX PROVISION (BENEFIT)
    
    
    6,476
    
    
    
    (9,324
    )
    
    
    4,804
    
    
    
    17,316
    *
    
    
    15,237NET INCOME (LOSS)
    
    $
    11,984
    
    
    $
    (14,986
    )
    
    $
    13,122
    
    
    $
    32,219
    *
    
    $
    24,862EARNINGS (LOSS) PER SHARE:BASIC
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53
    
    
    $
    1.32
    *
    
    $
    1.01DILUTED
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53
    
    
    $
    1.30
    *
    
    $
    1.00SHARES USED IN PER SHARE CALCULATION:BASIC
    
    
    24,860
    
    
    
    24,810
    
    
    
    24,602
    
    
    
    24,416
    
    
    
    24,571DILUTED
    
    
    25,034
    
    
    
    24,810
    
    
    
    24,837
    
    
    
    24,753
    
    
    
    24,972TOTAL ASSETS
    
    $
    206,367
    
    
    $
    277,100
    
    
    $
    307,141
    
    
    $
    312,468
    
    
    $
    306,435BANK BORROWINGS
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,800SHAREHOLDERS EQUITY
    
    $
    168,616
    
    
    $
    254,014
    *
    
    $
    266,223
    *
    
    $
    251,692
    *
    
    $
    221,665SHAREHOLDERS EQUITY PER COMMON SHARE
    
    $
    6.77
    
    
    $
    10.23
    *
    
    $
    10.75
    *
    
    $
    10.27
    *
    
    $
    9.00
 *As restated (see Note 17 to Consolidated Financial Statements).




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 5 MANAGEMENTS DISCUSSION AND ANALYSIS The following discussion of the Companys financial condition and results of
operations should be read in conjunction with the
fiscal 2004 Consolidated Financial Statements and the notes thereto and the
other financial and statistical information appearing
elsewhere in this annual report. OVERVIEW The Company generates revenues through the rental, lease and sale of electronic
equipment, including test and measurement
(T&M) and computer-related (DP) equipment. In fiscal 2004, 72% of rental and
lease revenues was derived from T&M equipment.
This percentage has been increasing over the last four years as a result of a
steady erosion of DP revenues related to declines in
product purchase prices and unit volume. Rental revenues comprised 75% of
fiscal 2004 rental and lease revenue, and this percentage
also has been increasing over the last four years due to a significant decline
in personal computer leasing activity. A large part of our test and measurement equipment portfolio is rented or
leased to Fortune 500 companies in the aerospace,
defense, electronics and telecommunications industries. We believe that a large
part of our test and measurement equipment is
used in research and development activities and that a significant amount of
this equipment is used in connection with government-
generated projects. We also rent equipment to companies of various sizes
representing a cross-section of American industry. The profitability of our business also depends in significant part on
controlling the timing, pricing and mix of purchases and sales
of equipment. We seek to acquire new and used equipment at attractive prices
which we feel we can make a profit from a combination
of renting and/or selling them. At times, we may acquire equipment which we do
not intend to rent, because we think it
can be more profitably sold. The sale of equipment, either after acquisition or
after it has been rented, can comprise a significant
portion of revenues and operating profit. To maximize overall profit from the
rental, leasing, and sales of equipment, we manage
our equipment pool on an on-going basis by analyzing our product strategy for
each specific equipment class in light of that
equipments historical and projected life cycle. In doing so, we must compare
our estimate of potential profit from rental with the
potential profit from the products immediate sale and replacement with new or
other equipment. In our analysis, we assume
depreciation and impairment of equipment based on historical levels, although
historical trends are not necessarily indicative of
future trends. Our overall equipment management is complex and our product
strategy can change during a products lifetime
based upon numerous factors, including the U.S. and global economy, interest
rates and new product launches. Our strategic
equipment decisions are based on the following fundamentals:  
    
    The acquisition cost for Electro Rent;
    
    Our estimates of current and future market demand for rentals;
    
    Our estimates of current and future supply of product;
    
    The book value of the product after depreciation and other impairment;
    
    Our estimates of the effect of interest rates on rental and leasing fees as
well as capital financing; and
    
    Our estimates of the potential current and future sale prices. If we are unable to accurately predict market trends, or if demand for the
equipment we supply declines, we can be left with
large lots of inventory that we are unable to rent or sell for a profit. The
Company assesses the carrying value of the equipment
pool on a quarterly basis or when factors indicating impairment are present.
When the U.S. and global economy began to rebound
in fiscal 2004, we saw increased demand for our equipment, and the Company was
able to sell equipment that we had previously
written down or that was older and more fully depreciated. Due in part to these
events, the Company experienced greater than
normal gross margins on equipment sales in fiscal 2004. We intend to maintain
our equipment management strategy, and, accordingly,
we expect that gross margins on sales will return to normal historical levels
as older and previously impaired equipment
constitute a smaller percentage of sales. We measure our overall level of profitability with the following metrics:  
    
    Net income per diluted common share (EPS);
    
    Net income as a percentage of average earning assets (AEA); and
    
    Net income as a percentage of average tangible equity.




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##### 



PAGE 6 ELECTRO RENT 2004 ANNUAL REPORT PROFITABILITY AND KEY BUSINESS TRENDS In fiscal 2004, we improved profitability with each successive quarter. Lower
depreciation and selling, general and administrative
expenses, improved gross profit on equipment sales, and higher asset levels on
rent led to this improvement. During fiscal 2004, we focused on core T&M and DP markets. Organic growth has
been modest, consistent with the economic
environment. As a result, we have supplemented growth with the acquisition of a
small disaster recovery business that integrates
well with our existing DP business. Focused, prudent growth continues to be a
primary goal for fiscal 2005. Our profitability measurements are presented in the table below for the years
ended May 31: 2004
    
    2003
    
    2002Net income per diluted share
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53Net income as a percentage of AEA
    
    
    4.9
    %
    
    
    (5.4
    %)
    
    
    4.8
    %Return on average tangible equity
    
    
    5.6
    %
    
    
    (6.2
    %)
    
    
    5.9
    %
 After several years of declines, T&M rental and lease activity steadily
increased during fiscal 2004, reflecting the strengthening
global economy. However, DP rental and lease demand continued to be weak, and
rental and lease rates remained very competitive.
The amount of equipment on rent and lease, based on acquisition cost, increased
from $129.0 million at May 31, 2003,
to $141.7 million at May 31, 2004. The overall utilization rate for the
Companys equipment pool, based on acquisition cost,
increased from 54% at May 31, 2003, to 63% at May 31, 2004, reflecting
increased T&M demand and the Companys continued
liquidation and write-off of under-performing assets. We believe that demand for rental electronic equipment should improve as the
U.S. economy continues to recover. Also, increased
defense spending on advanced weapons and intelligence systems should benefit
the Company. While those developments continue
to unfold, however, the Company will strive to operate the business efficiently
at the prevailing activity levels. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of
America (generally accepted accounting principles) requires management to
make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
On a regular basis, management reviews
these estimates including those related to asset lives and depreciation
methods, impairment of long-lived assets including rental
and lease equipment and allowance for doubtful accounts. These estimates are
based on managements historical experience and
on various other assumptions believed to be reasonable under the circumstances.
Actual results may differ from these estimates
under different assumptions or conditions. Management believes, however, that
the estimates, including those for the above-listed
items, are reasonable. Management believes the following critical accounting policies affect the more
significant judgments and estimates used in the
preparation of the Companys financial statements: ASSET LIVES AND DEPRECIATION METHODS: The Companys primary business involves
the purchase and subsequent rental and
lease of long-lived electronic equipment. Management has chosen asset lives
that it believes correspond to the economic life of
the related asset. Management has chosen depreciation methods that it believes
match the benefit to the Company from the
assets with the associated costs. These judgments have been made based on
managements expertise in each equipment type
that the Company carries. If the asset life and depreciation method chosen do
not reduce the book value of the asset to at least
the potential future cash flows from the asset to the Company, the Company
would be required to record a loss on revaluation.
Depreciation methods and useful lives are periodically reviewed and revised as
deemed appropriate.




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 7 IMPAIRMENT OF LONG-LIVED ASSETS: On a quarterly basis, management reviews the
carrying value of its rental and lease
equipment to determine if the carrying value of the assets may not be
recoverable due to current and forecasted economic conditions.
This requires management to make estimates related to future cash flows from
the assets and to determine whether any
deterioration is temporary or permanent. If these estimates or the related
assumptions change in the future, management may
be required to record additional impairment charges. ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company maintains allowances for
doubtful accounts for estimated losses resulting
from the inability of customers to make rental and lease payments. These
estimates are primarily based on the amount of time
that has lapsed since the related payments were due as well as specific
knowledge related to the ability of customers to make
the required payments. If the financial condition of the Companys customers
were to deteriorate, additional allowances could be
required that would reduce income. Conversely, if the financial condition of
the customers were to improve or if legal remedies to
collect past due amounts were more successful than expected, the allowance for
doubtful accounts may need to be reduced and
income would be increased. FISCAL 2004 COMPARED WITH FISCAL 2003 TOTAL REVENUES: Total revenues for fiscal 2004 decreased $14.7 million, or
13%, to $94.1 million compared to $108.8 million
in the prior year. The decline in total revenues was due to a decrease in
rental and lease revenue of 13% and a decrease in sales of
equipment and other revenues of 15%. Rental and lease revenues in fiscal 2004 were $70.3 million, a 13% decline from
the prior year. This decrease was the result of
lower demand in most of the Companys major market segments, stemming from the
global economic slowdown during fiscal
2003 and first half of fiscal 2004, and an excess supply of equipment on the
market available for customers to purchase.
Additionally, DP rental revenue continued to be negatively impacted by eroding
purchase prices of new personal computers and
by competition. Included in rental and lease revenues for fiscal 2004 is $1.2
million from the reversal of various accounts receivable
credits no longer owed to customers. There was no significant comparable
revenue in fiscal 2003. Sales of equipment and other revenues were $23.8 million in fiscal 2004, a
decrease of 15% as compared to fiscal 2003. This
decrease reflects lower demand, the Companys smaller rental and lease
equipment pool, and increased utilization. Sales continue
to occur routinely as a normal part of the Companys rental business; however,
these sales can fluctuate from quarter to quarter
and year to year depending on equipment availability and customer requirements
and funding. Gross margin on sales increased
from $8.4 million, or 34.9%, in fiscal 2003 to $9.4 million, or 44.4%, in
fiscal 2004, due to improvement in equipment market values
and increases in sales of equipment that had been previously written down or
that was older and more fully depreciated. The
Company expects that gross margin on sales will return to more normal levels
over the next two years as older and previously
impaired equipment become a smaller part of sales. DEPRECIATION OF RENTAL AND LEASE EQUIPMENT: Depreciation of equipment
decreased from $44.7 million in fiscal 2003, to
$30.6 million, in fiscal 2004. Depreciation expense was reduced by $14.2
million, or 32%, for fiscal 2004, and depreciation as a
percent of rental and lease revenues also decreased from 55% in fiscal 2003 to
43% in fiscal 2004 despite the 13% decline in
rental and lease revenues in fiscal 2004. These declines reflect the Companys
previous write-downs and continued liquidation of
under-performing assets. The acquisition cost of rental and lease equipment was
$239.7 million, $252.7 million and $322.9 million
at May 31, 2004, 2003, and 2002, respectively. COSTS OF REVENUES OTHER THAN DEPRECIATION : Costs of revenues other than
depreciation decreased from $17.9 million in fiscal
2003 to $14.2 million in fiscal 2004. Costs of revenues other than depreciation
primarily includes the cost of equipment sales,
which decreased from 65% of equipment sales in fiscal 2003 to 56% of equipment
sales in fiscal 2004. The decrease in this percentage
is due to the fact that a larger portion of equipment sold in fiscal 2004 was
more fully depreciated, had been previously
written down, or resulted from sales of leased equipment to leasing customers,
which typically results in higher margins.




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##### 



PAGE 8 ELECTRO RENT 2004 ANNUAL REPORT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses decreased $5.2 million, or
14% to $32.2 million, in fiscal 2004 as compared to $37.4 million in fiscal
2003. Fiscal 2004 includes a $2.3 million accrual related
to the retirement of the Companys former President. Excluding the one-time
charge, SG&A expenses declined by $7.5 million, or
20%, in fiscal 2004 compared to the prior year. Excluding the one-time charge,
these expenses as a percentage of total revenues
decreased from 34% in fiscal 2003 to 32% in fiscal 2004. The decline in SG&A
expenses is the result of continuous reductions in
almost all areas of the business, with approximately 60% of the reduction
relating to reduced personnel costs. OPERATING PROFIT: As a result of the changes in revenues and operating
expenses discussed above, operating profit was $17.1
million or 20% of total revenues in fiscal 2004 compared to an operating loss
of $28.4 million or 22% of total revenues in fiscal
2003. The operating loss in fiscal 2003 included the write-off of goodwill and
other intangibles of $37.1 million. INTEREST INCOME, NET: Net interest income of $1.3 million for fiscal 2004 was
36% lower than the $2.1 million recorded in
the prior year, mainly as a result of decreased investments due to the $99.5
million special cash distribution paid to common
shareholders on January 14, 2004. In addition, interest rates were lower in the
current year. INCOME TAX PROVISION (BENEFIT): The effective tax rate was 35% for fiscal 2004
as compared to 38% for the prior year. This
rate reduction is due to the completion of certain U.S. federal and Canadian
provincial tax audits. As a result, the Company reevaluated
its accrued liability for income taxes and reduced income tax expense by
approximately $666,000 in fiscal 2004. FISCAL 2003 COMPARED WITH FISCAL 2002 TOTAL REVENUES: Total revenues for fiscal 2003 decreased $39.1 million, or
26%, to $108.8 million compared to $147.9 million
in the prior year. The decline in total revenues was due to a decrease in
rental and lease revenue of 30% and a decrease in sales of
equipment and other revenues of 14%. Rental and lease revenues in fiscal 2003 were $80.7 million, a 30% decline from
the prior year. This decrease was primarily the
result of lower demand in the Companys major market segments stemming from the
global economic slowdown. Additionally, DP
rental revenue continued to be negatively impacted by declining purchase prices
of new personal computers and competition. Sales of equipment and other revenues were $28.1 million in fiscal 2003, a
decrease of 14% as compared to fiscal 2002. This
decrease reflects lower demand and a smaller equipment pool, primarily for DP
equipment. DEPRECIATION OF RENTAL AND LEASE EQUIPMENT: Depreciation of equipment
decreased from $58.6 million in fiscal 2002 to
$44.7 million in fiscal 2003 as a result of our efforts to dispose of equipment
coupled with our decision to reduce purchases of
new equipment significantly. Although depreciation expense was reduced by $13.9
million, or 24%, for fiscal 2003, depreciation
increased to 55% of rental and lease revenues in fiscal 2003 from 51% of rental
and lease revenues in fiscal 2002 because the 30% decline in rental and lease revenues in fiscal 2003 was not entirely offset
by the Companys efforts in reducing the equipment
pool size. COSTS OF REVENUES OTHER THAN DEPRECIATION : Costs of revenues other than
depreciation decreased from $23.0 million in
fiscal 2002 to $17.9 million in fiscal 2003. Costs of revenues other than
depreciation primarily includes the cost of equipment
sales, which decreased from 70% of equipment sales in fiscal 2002 to 65% of
equipment sales in fiscal 2003. This cost ratio
decrease reflects the liquidation of older used equipment, which during fiscal
2003 the Company was able to sell at higher prices
relative to its book value. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses decreased $13.1 million,
or 26%, to $37.4 million in fiscal 2003 as compared to $50.5 million in fiscal
2002. These expenses as a percentage of total
revenues remained unchanged at 34% for each year. The decline in SG&A expenses
is the result of reductions in almost all areas
of the business, with approximately 52% of the reduction relating to personnel
costs, partly offset by certain restructuring costs
described below.




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##### 



ELECTRO RENT 2004 ANNUAL
REPORT PAGE 9 During fiscal 2003, we continued our cost reduction activities to better align
expense levels with current revenue levels and
reduce spending under the current economic conditions. In particular, we closed
our Duluth, Georgia, distribution center during
the fourth quarter of fiscal 2003, reducing the total number of Company
locations to fourteen, and we had 304 employees at the
end of fiscal 2003, compared to 425 at the end of the prior year. As a result
of these actions, we recorded restructuring charges
of approximately $821,000 during the fourth quarter of fiscal 2003. These
charges included approximately $570,000 for the lease
liability and approximately $31,000 for property and equipment related to our
Duluth facility and severance from employee
terminations of approximately $220,000. Approximately $113,000 of the employee
severance was paid during fiscal 2003 and
the remainder was paid in fiscal 2004. No comparable restructuring charges were
recorded during fiscal 2002. LOSS ON IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS: During fiscal 2003,
the Company incurred an expense of
$35.7 million as a result of an evaluation done under Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. In accordance with SFAS No. 142, we performed
impairment testing for goodwill and other intangible
assets during the quarter ended May 31, 2003. Recorded goodwill related
primarily to the GE Capital Technology Management
Services (TMS) acquisition in fiscal 1998, and other intangible assets
related to the Genstar Rental Electronics, Inc. acquisition in
fiscal 1995. Since we operate in a single business segment as a single business
unit, the determination of whether an impairment
of goodwill existed was based on a comparison of the fair value of the entire
Company to the carrying value of our net assets. In
estimating the fair value of the entire Company, we reviewed the average and
closing stock prices for our Common Stock, as well
as other factors. Because the fair value of the entire Company was determined
to be less than the carrying value of our net assets,
we were required to record an impairment loss on goodwill of $35.7 million.
Additionally, because the Genstar trade name and
customer contracts were deemed to no longer have value to the Company, we were
required to record an impairment loss on
intangible assets of $1.4 million. As a result of these impairment losses
recorded in the quarter ended May 31, 2003, the balances
for goodwill and intangible assets were reduced to zero. There were no charges
for impairment of goodwill and other intangible
assets in fiscal 2002. OPERATING PROFIT (LOSS): As a result of the changes in revenues and
operating expenses discussed above, the operating loss
before interest and insurance settlement income was $28.4 million or 26% of
total revenues in fiscal 2003 compared to operating
earnings of $15.7 million or 11% of total revenues in fiscal 2002. The
operating loss in fiscal 2003 includes the write-off of goodwill
and other intangibles of $37.1 million. INTEREST INCOME, NET: Net interest income decreased from $2.2 million in fiscal
2002 to $2.1 million in fiscal 2003,
despite a substantial increase in cash equivalent investments. This was due to
lower prevailing rates of interest in moneymarket
instruments. INCOME FROM INSURANCE SETTLEMENT: On July 22, 2003, the Company received a
one-time insurance settlement of $2.0 million
related to unrecoverable rental and lease equipment written off in years prior
to fiscal 2003. The Companys claim was settled
and the insurance proceeds were recorded as other income in fiscal 2003. There
was no comparable income in fiscal 2002. INCOME TAX (BENEFIT) PROVISION: The Company recorded a tax benefit in fiscal
2003 due to the operating loss discussed
above. In addition, at fiscal year-end, the Company re-evaluated its accrued
liability relating to state, federal, local and foreign
income taxes and reduced income tax expense by approximately $500,000 in the
fourth quarter of fiscal 2003. In the prior year,
we recorded a $2.0 million reduction in income tax expense related to a similar
re-evaluation. As a result, the effective tax benefit
rate was 38% in fiscal 2003, as compared to a 27% tax provision rate in fiscal
2002. LIQUIDITY AND CAPITAL RESOURCES Historically, the Companys primary capital requirements have been purchases of
rental and lease equipment and debt service.
The Company generally purchases equipment throughout each year to replace
equipment that has been sold, and to maintain
adequate levels of rental equipment to meet existing and new customer demands.
However, the rental and leasing market for
personal computers and T&M equipment declined over the last four years, and,
accordingly, the Companys equipment purchases
declined in fiscal 2001, 2002, and 2003. During fiscal 2004 the Company
experienced a modest increase in overall rental activity,




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##### 



PAGE 10 ELECTRO RENT 2004 ANNUAL REPORT although rental rates continue to be depressed. To support some areas of
potential growth for both T&M and DP equipment, and to
keep the Companys equipment pool technologically up-to-date, the Company
increased purchases of equipment in fiscal 2004
over the previous year. The Company has had no bank borrowings since the third
quarter of fiscal 2001. On January 14, 2004, the Company paid a special distribution of $4.00 per
outstanding common share, which totaled $99.5
million. Following this distribution, cash and cash equivalents are likely to
continue to accumulate, unless the recent increased
level of equipment purchases is sustained or the Company decides to buy back
additional shares of its common stock, pay
another special distribution, pay dividends, finance another acquisition, or
pursue other opportunities. The Company has invested
its growing cash balance in U.S. government money market funds and other
instruments with maturities of less than 90 days. During fiscal year 2001, the Companys Board of Directors authorized management
to implement a limited stock repurchase
program in the amount of 1,500,000 shares. As of May 31, 2004, the Company had
bought back and retired 318,000 common
shares for $3.0 million, or $9.37 per share. The only shares repurchased since
fiscal 2001 have been in connection with the
stock-for-stock exercise of employee options. Shares acquired are retired. Electro Rents rental and lease equipment portfolio totaled $239.7 million, at
acquisition cost, at May 31, 2004, decreasing
$12.9 million from last year. During the three years ended May 31, 2004, the
Company made payments for equipment purchases
totaling $120.6 million, while recording a net decrease in its equipment
portfolio at acquisition cost of $149.7 million resulting
from the liquidation of used equipment. The Company has three principal sources
of liquidity: cash flows provided by its operating
activities, proceeds from the sale of equipment from its portfolio, and
external funds that historically have been provided by
bank borrowings. During fiscal 2004 and 2003 net cash provided by operating activities was $42.0
million and $49.1 million, respectively. The
decrease in fiscal 2004 results primarily from the decline in revenues and
operating margins before depreciation and amortization
expense, and changes in operating assets and liabilities. During fiscal 2004 net cash used in investing activities was $64.8 million,
compared to $13.6 million in the prior year. This
increase is mostly attributable to the purchase of marketable securities and
increased payments for the purchase of rental and
lease equipment. During fiscal 2003 net cash flows provided by financing activities were $0.2
million compared to $99.0 million used in financing
activities for fiscal 2004. This change primarily reflects the payment of the
special distribution in fiscal 2004 discussed above. As the following table illustrates, cash flows from operating activities and
proceeds from the sale of equipment have been more
than sufficient to fund the Companys operations during the last three years. Three Years Ended(in thousands)
    
    2002
    
    2003
    
    2004
    
    May 31, 2004Cash flows from operating activities(1)
    
    $
    76,411
    
    
    $
    49,148
    
    
    $
    42,021
    
    
    $
    167,580Proceeds from sale of equipment
    
    
    27,913
    
    
    
    24,005
    
    
    
    21,093
    
    
    
    73,011Total
    
    $
    104,324
    
    
    $
    73,153
    
    
    $
    63,114
    
    
    $
    240,591Payments for equipment purchases
    
    $
    (51,159
    )
    
    $
    (26,653
    )
    
    $
    (42,815
    )
    
    $
    (120,627
    )Net decrease in equipment portfolio at acquisition cost
    
    $
    (66,549
    )
    
    $
    (70,186
    )
    
    $
    (12,929
    )
    
    $
    (149,664
    )
  (1)
    
    For the components of cash flows from operating activities, see the
Consolidated Statements of Cash Flows. As indicated by the table, cash flows from operating activities and proceeds
from sale of equipment provided 199% of the funds
required for equipment purchased during the three-year period ended May 31,
2004. Rental and lease revenues have been significantly
supplemented as a source of cash flow by proceeds from the sale of equipment
from Electro Rents portfolio. Management
believes that cash and cash equivalents, cash flows from operating activities,
proceeds from the sale of equipment and its borrowing
capacity (see Note 4 of Notes to Consolidated Financial Statements) will be
sufficient to fund the Companys operations for at
least the next twelve months.




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 11 The Company has a $10.0 million revolving line of credit with a bank, subject
to certain restrictions, to meet equipment acquisition
needs as well as working capital and general corporate requirements. The
Company had no borrowings outstanding at
May 31, 2004. The Company leases certain facilities under various operating leases. Most of
the lease agreements provide the Company with
the option of renewing its lease at the end of the initial lease term, at the
fair rental value, for periods of up to five years. In most
cases, management expects that in the normal course of business facility leases
will be renewed or replaced by other leases. Inflation generally has favorably influenced the Companys results of
operations by enhancing the sale prices of its used equipment.
However, lower inflation rates and the continued availability of newer, less
expensive equipment with similar or better
specifications could result, over a period of several years, in lower relative
sale prices for used electronic equipment. If this should
occur, the Companys margins and earnings will be reduced. Prices of new and
used electronic test equipment have not consistently
followed the overall inflation rate. Prices of new and used personal computers
and servers have consistently declined for
the past three years. Because management is unable to predict the advances in
technology and the rate of inflation for the next
several years, it is not possible to estimate the impact of these factors on
the Companys margins and earnings. CONTRACTUAL OBLIGATIONS The table below presents the amount of payments due under the Companys
contractual obligations. The table reflects expected
payments due as of May 31, 2004 and does not reflect changes that could arise
after that time. Payments due by periodLess
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    1-3
    
    3-5
    
    than 5Contractual Obligations (in thousands)
    
    Total
    
    year
    
    years
    
    years
    
    yearsFacility lease payments, not including property taxes
and insurance
    
    $
    1,234
    
    
    $
    960
    
    
    $
    274
    
    
    $
    
    
    
    $
    Total
    
    $
    1,234
    
    
    $
    960
    
    
    $
    274
    
    
    $
    
    
    
    $
    




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##### 



PAGE 12 ELECTRO RENT 2004 ANNUAL REPORT QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT INTEREST RATES AND CURRENCY RATES The Company is exposed to market risks related to changes in interest rates and
foreign currency exchange rates, however, the
Company believes those risks to be not material in relation to our operations.
We do not have any derivative financial instruments. As of May 31, 2004 and 2003, cash and cash equivalents included money market
securities and the Company had investments
in marketable securities. Due to the short-term duration of our investment
portfolio, an immediate 10% change in interest rates
would not have a material effect on the fair market value of our portfolio,
therefore, the Company would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our
securities portfolio. The Company is also subject to risks associated with foreign currency rate
fluctuations to the extent of financing arrangements
for rented and leased equipment denominated in Canadian dollars or euros. The
Company has determined that hedging of these
assets is not cost effective and instead attempts to minimize its risks due to
currency and exchange rate fluctuations through
working capital management. The Company does not believe that any foreseeable
change in currency rates would materially or
adversely affect its financial position or results of operations.




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##### 



PAGE 14 ELECTRO RENT 2004 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME Year Ended May 31,(in thousands, except per share information)
    
    2004
    
    2003
    
    2002REVENUES:Rentals and leases
    
    $
    70,268
    
    
    $
    80,667
    
    
    $
    115,310Sales of equipment and other revenues
    
    
    23,842
    
    
    
    28,129
    
    
    
    32,554Total revenues
    
    
    94,110
    
    
    
    108,796
    
    
    
    147,864OPERATING EXPENSES:Depreciation of rental and lease equipment
    
    
    30,559
    
    
    
    44,733
    
    
    
    58,639Costs of revenues other than depreciation of rental
and lease equipment
    
    
    14,219
    
    
    
    17,930
    
    
    
    23,039Selling, general and administrative expenses
    
    
    32,207
    
    
    
    37,399
    
    
    
    50,492Loss on impairment of goodwill
    
    
    
    
    
    
    35,703
    
    
    
    Loss on impairment of intangibles
    
    
    
    
    
    
    1,432
    
    
    
    Total operating expenses
    
    
    76,985
    
    
    
    137,197
    
    
    
    132,170Operating profit (loss)
    
    
    17,125
    
    
    
    (28,401
    )
    
    
    15,694Interest income, net
    
    
    1,335
    
    
    
    2,091
    
    
    
    2,232Income from insurance settlement
    
    
    
    
    
    
    2,000
    
    
    
    Income (loss) before income taxes
    
    
    18,460
    
    
    
    (24,310
    )
    
    
    17,926Income tax provision (benefit)
    
    
    6,476
    
    
    
    (9,324
    )
    
    
    4,804Net income (loss)
    
    $
    11,984
    
    
    $
    (14,986
    )
    
    $
    13,122Earnings (loss) per share:Basic
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53Diluted
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53Shares used in per share calculation:Basic
    
    
    24,860
    
    
    
    24,810
    
    
    
    24,602Diluted
    
    
    25,034
    
    
    
    24,810
    
    
    
    24,837
 The accompanying notes are an integral part of these Consolidated Financial
Statements.




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 15 CONSOLIDATED BALANCE SHEETS As of May 31, (in thousands, except share information)
    
    2004
    
    2003(As restated)ASSETSCash and cash equivalents
    
    $
    29,692
    
    
    $
    151,448Marketable securities
    
    
    52,475
    
    
    
    10,000Accounts receivable, net of allowance for doubtful accounts of $1,157 and $1,106
    
    
    8,095
    
    
    
    6,874Rental and lease equipment, net of accumulated depreciation of $143,403 and $165,334
    
    
    96,346
    
    
    
    87,344Other property, net of accumulated depreciation and amortization of $11,547 and $10,997
    
    
    16,084
    
    
    
    16,409Other
    
    
    3,675
    
    
    
    5,025$
    206,367
    
    
    $
    277,100LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    16,560
    
    
    $
    6,332Accrued expenses
    
    
    11,000
    
    
    
    11,742Deferred revenue
    
    
    2,197
    
    
    
    1,833Deferred tax liability
    
    
    7,994
    
    
    
    3,179Total liabilities
    
    
    37,751
    
    
    
    23,086Commitments and contingencies (Note 10)Shareholders equity:Preferred stock, $1 par  shares authorized 1,000,000; none issuedCommon stock, no par  shares authorized 40,000,000; issued and
outstanding 2004 - 24,897,539; 2003 - 24,821,015
    
    
    19,502
    
    
    
    16,023Retained earnings
    
    
    149,114
    
    
    
    237,991Total shareholders equity
    
    
    168,616
    
    
    
    254,014$
    206,367
    
    
    $
    277,100
 The accompanying notes are an integral part of these Consolidated Financial Statements.




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##### 



PAGE 16 ELECTRO RENT 2004 ANNUAL REPORT CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Three years ended May 31, 2004
    
    Common StockNumber
    
    
    
    
    
    Retained(in thousands)
    
    of Shares
    
    Amount
    
    EarningsBalance, June 1, 2001, as previously reported
    
    
    24,503
    
    
    $
    11,782
    
    
    $
    238,404Prior period adjustment (Note 17)
    
    
    
    
    
    
    
    
    
    
    1,506Balance, June 1, 2001, as restated
    
    
    24,503
    
    
    
    11,782
    
    
    
    239,910Exercise of stock options, net
    
    
    276
    
    
    
    1,467
    
    
    
    Repurchase of common stock
    
    
    (4
    )
    
    
    (3
    )
    
    
    (55
    )Net income for the year ended May 31, 2002
    
    
    
    
    
    
    
    
    
    
    13,122Balance, May 31, 2002, as restated
    
    
    24,775
    
    
    
    13,246
    
    
    
    252,977Exercise of stock options, net
    
    
    46
    
    
    
    242
    
    
    
    Tax benefit for stock options exercised
    
    
    
    
    
    
    2,535
    
    
    
    Net loss for the year ended May 31, 2003
    
    
    
    
    
    
    
    
    
    
    (14,986
    )Balance, May 31, 2003, as restated
    
    
    24,821
    
    
    
    16,023
    
    
    
    237,991Exercise of stock options, net
    
    
    185
    
    
    
    1,978
    
    
    
    Tax benefit for stock options exercised
    
    
    
    
    
    
    1,599
    
    
    
    Repurchase of common stock
    
    
    (108
    )
    
    
    (98
    )
    
    
    (1,346
    )Special distribution
    
    
    
    
    
    
    
    
    
    
    (99,515
    )Net income for the year ended May 31, 2004
    
    
    
    
    
    
    
    
    
    
    11,984Balance, May 31, 2004
    
    
    24,898
    
    
    $
    19,502
    
    
    $
    149,114
 The accompanying notes are an integral part of these Consolidated Financial Statements.




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 17 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended May 31,(in thousands)
    
    2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    11,984
    
    
    $
    (14,986
    )
    
    $
    13,122Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    31,483
    
    
    
    46,279
    
    
    
    60,781Loss on impairment of goodwill
    
    
    
    
    
    
    35,703
    
    
    
    Loss on impairment of intangibles
    
    
    
    
    
    
    1,432
    
    
    
    Provision for losses on accounts receivable
    
    
    645
    
    
    
    605
    
    
    
    2,930Gain on sale of rental and lease equipment
    
    
    (9,379
    )
    
    
    (8,386
    )
    
    
    (8,294
    )Deferred tax liability
    
    
    4,815
    
    
    
    (12,638
    )
    
    
    (1,126
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,866
    )
    
    
    4,544
    
    
    
    8,856Other assets
    
    
    1,350
    
    
    
    (1,129
    )
    
    
    (122
    )Accounts payable
    
    
    1,768
    
    
    
    (470
    )
    
    
    448Accrued expenses
    
    
    857
    
    
    
    (923
    )
    
    
    (2,900
    )Deferred revenue
    
    
    364
    
    
    
    (883
    )
    
    
    2,716Net cash provided by operating activities
    
    
    42,021
    
    
    
    49,148
    
    
    
    76,411CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of rental and lease equipment
    
    
    21,093
    
    
    
    24,005
    
    
    
    27,913Payments for purchase of rental and lease equipment
    
    
    (42,815
    )
    
    
    (26,653
    )
    
    
    (51,159
    )Purchases of marketable securities
    
    
    (42,475
    )
    
    
    (10,000
    )
    
    
    Payments for purchase of other property
    
    
    (599
    )
    
    
    (917
    )
    
    
    (87
    )Net cash used in investing activities
    
    
    (64,796
    )
    
    
    (13,565
    )
    
    
    (23,333
    )CASH FLOWS FROM FINANCING ACTIVITIES:Special distribution
    
    
    (99,515
    )
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    534
    
    
    
    242
    
    
    
    1,409Net cash (used in) provided by financing activities
    
    
    (98,981
    )
    
    
    242
    
    
    
    1,409Net (decrease) increase in cash and cash equivalents
    
    
    (121,756
    )
    
    
    35,825
    
    
    
    54,487Cash and cash equivalents at beginning of year
    
    
    151,448
    
    
    
    115,623
    
    
    
    61,136Cash and cash equivalents at end of year
    
    $
    29,692
    
    
    $
    151,448
    
    
    $
    115,623
 The accompanying notes are an integral part of these Consolidated Financial Statements.




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##### 



PAGE 18 ELECTRO RENT 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended May 31, 2004, 2003, and 2002
(U.S. dollar amounts in thousands, except per share amounts) NOTE ONE: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND ORGANIZATION : Electro Rent Corporation primarily engages in
the short-term rental and the lease of state-of-the-art electronic equipment.
The Company maintains an equipment portfolio composed primarily of general
purpose test and measurement instruments (T&M) and personal computers and
servers (DP) purchased from leading manufacturers. Another aspect of the
Companys business is the sale of equipment after its utilization for rental or
lease. The Companys wholly owned subsidiaries, Genstar Rental Electronics,
Inc., and ER International, Inc., act as the Companys agents in Canada and
Europe, respectively, for all of these business activities. The Companys customers are primarily located in the United States and operate
in various industry segments including aerospace and defense,
telecommunications, consulting and computer technology. During fiscal 2004,
2003, and 2002 no customer accounted for more than 10% of total revenues. BASIS OF PRESENTATION : The consolidated financial statements include
Electro Rent Corporation and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated. Certain reclassifications have
been made to the prior year amounts to conform to the current year
presentation. USE OF ESTIMATES : The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as well as the disclosures of contingent
assets and liabilities as of the date of these financial statements and the
reported amounts of revenues and expenses during the reporting period. On a
regular basis, management reviews these estimates including those related to
asset lives and depreciation methods, impairment of long-lived assets including
rental and lease equipment and intangibles, allowance for doubtful accounts,
and contingencies and litigation. These estimates are based on managements
historical experience and on various other assumptions believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Management believes,
however, that the estimates, including those for the above-listed items, are
reasonable. REVENUE RECOGNITION: Rental and lease revenues are recognized on the accrual
basis of accounting. Rentals and leases are billed to customers in advance, and
unearned billings are recorded as deferred revenue. Other revenues consist of
billings to customers for equipment sales, delivery, or repairs, which are
recognized in the period in which the respective equipment is shipped and risk
of loss is passed to the customer or the services are performed. Interest
income on cash equivalents and marketable securities is recognized in the
period earned. RENTAL AND LEASE EQUIPMENT AND OTHER PROPERTY: Assets are generally stated
at cost, less accumulated depreciation. Upon retirement or disposal of assets,
the cost and the related allowance for depreciation are eliminated from the
accounts and any gain or loss is recognized. Depreciation of rental and lease
equipment and other property is computed using the straight-line and
sum-of-the-years-digits methods over the estimated useful lives of the
respective equipment. Generally, new rental and lease equipment is depreciated
over three to seven years, and used equipment over two to six years, depending
on the type of equipment. Depreciation methods and useful lives are
periodically reviewed and revised, as deemed appropriate. Normal maintenance
and repairs are expensed as incurred. Rental and lease equipment at net book
value comprised $85,663 of T&M equipment and $10,683 of DP equipment at May 31,
2004, and $75,314 of T&M equipment and $12,030 of DP equipment at May 31, 2003. INCOME TAXES : The Company recognizes a liability or asset for the deferred
tax consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when reported amounts of the assets or liabilities are recovered or settled.
The deferred tax assets are periodically reviewed for recoverability. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of cash and cash
equivalents, accounts receivable and accounts payable approximates fair value
due to the short maturity of these instruments. Cash and short-term investments
with original maturities of 90 days or less are considered to be cash
equivalents.




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 19 IMPAIRMENT OF ASSETS: The carrying value of equipment held for rental and
lease is assessed quarterly or when factors indicating impairment are present.
The Company recognizes impairment losses on equipment held for rental and lease
when the expected future undiscounted cash flows are less than the assets
carrying value, in which case the asset is written down to its estimated fair
value. GOODWILL AND INTANGIBLES : Until May 31, 2001, goodwill was amortized
over a period of 40 years and intangibles were amortized on a straight-line
basis over their estimated useful lives, to a residual of zero. On June 1,
2001, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 Goodwill and Other Intangible Assets, which provides that intangible
assets with finite useful lives be amortized over that life and that goodwill
and intangible assets with indefinite lives not be amortized, but will be
tested at least annually for impairment. As a result of our impairment reviews
of goodwill and other intangible assets in fiscal 2003, we wrote off $35,703 of
goodwill and $1,432 of intangible assets in fiscal 2003. (See Note 3.) MARKETABLE SECURITIES: The Company considers its marketable securities
available-for-sale as defined in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and, accordingly, they are carried
at fair value. Realized gains and losses and declines in value considered to be
other than temporary are included in income in the year they occur. The cost of
securities sold is based on the specific identification method. There were no
significant realized or unrealized gains or losses, nor any significant
differences between estimated fair values, based on quoted market prices, and
the costs of securities in the investment portfolio as of May 31, 2004. The
Companys marketable securities consist of auction rate securities, which carry
interest or dividend rates that reset every 49 days or less but have original
contractual maturities of greater than one year. ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of
customers to make rental and lease payments. These estimates are primarily
based on the amount of time that has lapsed since the related payments were due
as well as specific knowledge related to the ability of customers to make the
required payments. If the financial condition of the Companys customers were
to deteriorate, additional allowances could be required that would reduce
income. Conversely, if the financial condition of the customers were to improve
or if legal remedies to collect past due amounts were more successful than
expected, the allowance for doubtful accounts may need to be reduced and income
would be increased. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of cash
equivalents, marketable securities and trade accounts receivable. The Company
invests excess cash primarily in money market funds of major financial
institutions and auction rate securities of rated or investment grade corporate
issuers. Excess cash of $17.5 million was invested in eight large U.S.
Government money market funds, $5.0 million was invested in a large municipal
money market fund, and $52.5 million was invested in auction rate securities as
of May 31, 2004. The Company believes it is not exposed to any significant
financial risk on cash. For trade accounts receivable, the Company sells
primarily on 30-day terms, performs credit evaluation procedures on each
customers individual transactions and requires security deposits or personal
guarantees from its customers when significant credit risks are identified.
Typically, most customers are large, established firms. An adequate allowance
for potential credit losses is maintained. The Company purchases rental and lease equipment from numerous vendors. During
fiscal 2004, 2003, and 2002, Agilent
Technologies, Inc. accounted for approximately 54%, 43% and 36%, respectively,
and Tektronics, Inc. accounted for approximately 17%, 15% and 13%,
respectively, of such purchases. No other vendor accounted for more than 10% of
such purchases. FOREIGN CURRENCY: All assets and liabilities of the Companys wholly-owned
foreign subsidiaries are translated from their functional currency to U.S.
dollars at year-end exchange rates. Revenues and expenses are translated from
functional currencies to U.S. dollars using an average exchange rate for the
year. The Companys foreign subsidiaries have insignificant assets,
liabilities, revenues and expenses. The Canadian dollar is the only foreign
functional currency, and it has been very stable in relation to the U.S.
dollar. Historically, translation gains and losses have not been significant. Foreign currency transaction gains and losses are included in the determination
of net income. Included in consolidated net income are net foreign currency
transaction gains (losses) of $(13), $12, and $20 realized during fiscal 2004,
2003, and 2002, respectively.




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##### 



PAGE 20 ELECTRO RENT 2004 ANNUAL REPORT NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Basic earnings per share
(EPS) is computed as net income divided by the weighted average number of
shares of common stock outstanding for the reported year, excluding the
dilutive effects of stock options and other potentially dilutive securities.
Diluted EPS is computed as net income divided by the weighted average number of
shares outstanding of common stock and common stock equivalents for the
reported year. Common stock equivalents result from the dilutive stock options
computed using the treasury stock method. CASH FLOW: Supplemental disclosures of cash paid during the year for: 2004
    
    2003
    
    2002Interest
    
    $
    20
    
    
    $
    10
    
    
    $
    9Income taxes
    
    
    1,610
    
    
    
    3,962
    
    
    
    4,666
 Supplemental disclosure of non-cash investing and financing activities: The
Company acquired equipment of $14,703, $6,243, and $6,626, at May 31, 2004,
2003, and 2002, respectively, which was paid for during the subsequent year.
The Company recorded a tax benefit of $1,599 and $2,535 in fiscal 2004 and
2003, respectively, for employee stock options exercised which increased common
stock. Additionally, the Company increased shareholders equity by $1,444 and
$58 in fiscal 2004 and 2002, respectively, as a result of stock-for-stock
exercises of stock options which are not included on the statement of cash
flows. STOCK-BASED COMPENSATION : The Company applies the intrinsic-value-based
method prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for employee stock
options. Accordingly, compensation expense is recognized only when options are
granted with a discounted exercise price. Any such compensation expense is
recognized ratably over the associated service period, which is generally the
option vesting term. Under APB Opinion No. 25, no compensation expense was
recognized for fiscal 2004, 2003 or 2002. The Companys net earnings (loss) and earnings (loss) per share would have been
adjusted to the pro forma amounts shown below if compensation cost had been
determined based on the fair value at the grant dates in accordance with SFAS
No. 123 (as amended by SFAS No. 148), Accounting for Stock-Based
Compensation. 2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    11,984
    
    
    $
    (14,986
    )
    
    $
    13,122Less: compensation cost determined under the fair
value method, net of tax
    
    
    1,000
    
    
    
    931
    
    
    
    541Pro forma net income (loss)
    
    $
    10,984
    
    
    $
    (15,917
    )
    
    $
    12,581Basic earnings (loss) per share:As reported
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53Pro forma
    
    
    0.44
    
    
    
    (0.64
    )
    
    
    0.51Diluted earnings (loss) per share:As reported
    
    
    0.48
    
    
    
    (0.60
    )
    
    
    0.53Pro forma
    
    
    0.44
    
    
    
    (0.64
    )
    
    
    0.51
 The fair value of these options was estimated at grant date using a
Black-Scholes option pricing model with the following weighted-average
assumptions: 2004
    
    2003
    
    2002Average risk-free interest rate
    
    
    3.0
    %
    
    
    3.8
    %
    
    
    4.8
    %Expected dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0Expected volatility
    
    
    46.0
    
    
    
    45.5
    
    
    
    44.1Expected life
    
    
    5.0
    
    
    
    4.8
    
    
    
    4.2




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 21 The weighted average fair value per option granted was $5.36 in 2004, $4.93 in
2003 and $6.81 in 2002. NOTE TWO: RESTRUCTURING CHARGE Due to the prolonged downturn in our industry, in May 2003 the Company
restructured its business as part of its continuing program to create
efficiencies within our operations. The Company recorded restructuring charges
of $821 in selling, general and administrative expenses, which included the
following: Reducing the Companys workforce by 27 employees, mainly in the Duluth,
Georgia, warehouse and sales office, resulting in a severance charge of
approximately $220. Approximately $113 was paid in May 2003, and the
remainder was paid in fiscal 2004. Closing of the Duluth, Georgia, warehouse. Property and equipment that was
disposed of or removed from operations resulted in a charge of $31 and
consisted primarily of leasehold improvements, equipment and furniture and
fixtures. In addition, the Company incurred a charge of $570 associated with
the lease related to the closed facility, which represents the fair value of
the liability determined based on the remaining lease rentals, reduced by
estimated sublease rentals. Amounts accrued (net of estimated sublease
proceeds) related to the facility closure will be paid over the remaining
lease term through May 2005. Remaining
    
    
    
    
    
    RemainingLiability
    
    
    
    
    
    LiabilityBalances
    
    
    
    
    
    Balancesas of
    
    Cash
    
    as ofMay 31, 2003
    
    Payments
    
    May 31, 2004Severance
    
    $
    107
    
    
    $
    (107
    )
    
    $
    Lease commitments
    
    
    570
    
    
    
    (309
    )
    
    
    261$
    677
    
    
    $
    (416
    )
    
    $
    261
 NOTE THREE: GOODWILL AND OTHER INTANGIBLE ASSETS In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
SFAS No. 141 also specifies the types of acquired intangible assets that are
required to be recognized and reported separately from goodwill and those that
are required to be included in goodwill. The Company adopted SFAS No. 141 in
the first quarter of fiscal 2002. Adoption of SFAS No. 141 did not have a
significant impact on the Companys financial position or results of
operations. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization and the testing for impairment of goodwill at least
annually. The Company adopted SFAS No. 142 in the first quarter of fiscal 2002.
The impact of SFAS No. 142 on the Companys financial position and results of
operations was primarily the elimination of annual goodwill amortization of
$1,400. In accordance with SFAS No. 142, the Company performed impairment testing for
goodwill and other intangible assets during the quarter ended May 31, 2003.
Recorded goodwill related primarily to the GE Capital Technology Management
Services (TMS) acquisition in fiscal 1998, and other intangible assets
related to the Genstar Rental Electronics, Inc. acquisition in fiscal 1995.
Since the Company operates in a single business segment as a single business
unit, the determination of whether an impairment of goodwill
existed was based on a comparison of the fair value of the entire Company to
the carrying value of our net assets. In estimating the fair value of the
entire Company, the Companys management reviewed the average and closing stock
prices for our Common Stock, as well as other factors. Because the fair value
of the entire Company was determined to be less than the carrying value of our
net assets, the Company was required to record an impairment loss on goodwill
of $35.7 million. Additionally, because the Genstar trade name and customer
contracts were deemed to no longer have value to the Company, we were required
to record an impairment loss on intangible assets of $1.4 million. As a result
of these impairment losses recorded in the quarter




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##### 



PAGE 22 ELECTRO RENT 2004 ANNUAL REPORT ended May 31, 2003, the balances for goodwill and intangible assets were
reduced to zero. There were no charges for impairment of goodwill and other
intangible assets in fiscal 2004 or fiscal 2002. Goodwill and other intangible
assets are insignificant at May 31, 2004. Aggregate amortization expense on intangible assets, prior to their write-off,
was approximately $130 for the years ended May 31, 2003 and 2002. NOTE FOUR: BORROWINGS On November 27, 2003, the Company renewed its 364-day agreement with a bank to
provide a revolving line of credit for $10,000, subject to certain
restrictions, to meet potential equipment acquisition needs as well as working
capital and general corporate requirements. The interest rate on the line of
credit is based on the prime rate or LIBOR, and the Company had no borrowings
outstanding during the fiscal years ended May 31, 2004, 2003 or 2002. NOTE FIVE: INCOME TAXES The provision (benefit) for income taxes consists of the following for the
fiscal years ended May 31: 2004
    
    2003
    
    2002CurrentFederal
    
    $
    1,451
    
    
    $
    2,911
    
    
    $
    4,939State
    
    
    210
    
    
    
    402
    
    
    
    991DeferredFederal
    
    
    4,206
    
    
    
    (11,104
    )
    
    
    (985
    )State
    
    
    609
    
    
    
    (1,533
    )
    
    
    (141
    )$
    6,476
    
    
    $
    (9,324
    )
    
    $
    4,804
 A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows for the fiscal years ended May 31: 2004
    
    2003
    
    2002Statutory federal rate
    
    
    34.0
    %
    
    
    (35.0
    %)
    
    
    35.0
    %State taxes, net of federal benefit
    
    
    4.9
    
    
    
    (4.7
    )
    
    
    5.0Change in tax estimates resulting from completion ofUS Federal and Canadian provincial audits
    
    
    (3.6
    )
    
    
    (2.1
    )
    
    
    (11.2
    )Non-deductible portion of impairment loss
    
    
    
    
    
    
    5.2
    
    
    
    Other  net
    
    
    (0.3
    )
    
    
    (1.8
    )
    
    
    (2.0
    )Effective tax rate
    
    
    35.0
    %
    
    
    (38.4
    %)
    
    
    26.8
    %




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##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 23 The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities at May 31, 2004 and 2003 are as follows: 2004
    
    2003Deferred tax assets:Goodwill and intangible assets
    
    $
    7,433
    
    
    $
    8,306Allowance for doubtful accounts
    
    
    448
    
    
    
    428Net operating loss carry forwards
    
    
    265
    
    
    
    386Deferred compensation and benefits
    
    
    985
    
    
    
    962Other
    
    
    801
    
    
    
    1379,932
    
    
    
    10,219Deferred tax liabilities:Accumulated depreciation and amortization
    
    
    (17,926
    )
    
    
    (13,398
    )Net deferred tax liabilities
    
    $
    (7,994
    )
    
    $
    (3,179
    )
 Net operating loss carry forwards for federal income tax reporting purposes
approximate $778 at May 31, 2004 and are available for use against taxable
income through 2006. The utilization of operating loss carry forwards is
limited to $356 per year for federal income tax reporting purposes. NOTE SIX: FINANCED LEASE RECEIVABLES The Company has certain customer leases providing bargain purchase options,
which are accounted for as sales-type leases. Interest income is recognized
over the life of the lease using the effective interest method. The minimum
lease payments receivable and the net investment included in other assets for
such leases are as follows at May 31: 2004
    
    2003Gross minimum lease payments receivable
    
    $
    894
    
    
    $
    671Less  unearned interest
    
    
    (53
    )
    
    
    (39
    )Net investment in sales-type lease receivables
    
    $
    841
    
    
    $
    632
 NOTE SEVEN: COMPUTATION OF EARNINGS PER SHARE Following is a reconciliation of the denominator used in the computation of
basic and diluted EPS: 2004
    
    2003
    
    2002Denominator:Denominator for basic earnings per share  weightedaverage common shares outstanding
    
    
    24,860
    
    
    
    24,810
    
    
    
    24,602Effect of dilutive securities  options
    
    
    174
    
    
    
    
    
    
    
    23525,034
    
    
    
    24,810
    
    
    
    24,837Net income (loss)
    
    $
    11,984
    
    
    $
    (14,986
    )
    
    $
    13,122Earnings (loss) per share:Basic
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53Diluted
    
    $
    0.48
    
    
    $
    (0.60
    )
    
    $
    0.53




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##### 



PAGE 24 ELECTRO RENT 2004 ANNUAL REPORT Certain options to purchase the Companys common stock were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive. The quantity of such options is 52,306, 1,131,408, and 654,823 at
May 31, 2004, 2003, and 2002, respectively. NOTE EIGHT: RENTALS UNDER NONCANCELLABLE OPERATING LEASES The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make rental and lease payments.
These estimates are primarily based on the amount of time that has lapsed since
the related payments were due as well as specific knowledge related to the
ability of customers to make the required payments. If the financial condition
of the Companys customers were to deteriorate, additional allowances could be
required that would reduce income. Conversely, if the financial condition of
the customers were to improve or if legal remedies to collect past due amounts
were more successful than expected, the allowance for doubtful accounts may
need to be reduced and income would be increased. A roll-forward of the
allowance is as follows at May 31: 2004
    
    2003
    
    2002Beginning of year
    
    $
    1,106
    
    
    $
    2,461
    
    
    $
    1,840Provision for doubtful accounts
    
    
    645
    
    
    
    605
    
    
    
    2,930Write-offs
    
    
    (594
    )
    
    
    (1,960
    )
    
    
    (2,309
    )End of year
    
    $
    1,157
    
    
    $
    1,106
    
    
    $
    2,461
 The Company rents equipment on a short-term basis and leases equipment for
periods greater than 12 months. Such leases provide the lessee with the option
of renewing the agreement for periods of up to twelve months or purchasing the
equipment at fair market value at the end of the initial or renewal term. The
Companys cost of equipment under operating leases at May 31, 2004, with
remaining noncancellable lease terms of more than one year, is $16,133 before
accumulated depreciation of $7,796, and the net book value is $8,337. A schedule of minimum future rentals to be received on noncancellable operating
leases with remaining lease terms of more than one year as of May 31, 2004 is
as follows: 2005
    
    $
    7,4602006
    
    
    4,6972007
    
    
    1,1482008 (no lease terms extend beyond 2008)
    
    
    13$
    13,318
 NOTE NINE: OTHER PROPERTY Other property, at cost, consists of the following at May 31: 2004
    
    2003Land
    
    $
    6,985
    
    
    $
    6,985Buildings
    
    
    14,005
    
    
    
    13,781Furniture and other equipment
    
    
    6,420
    
    
    
    6,259Leasehold improvements
    
    
    221
    
    
    
    38127,631
    
    
    
    27,406Less  accumulated depreciation and amortization
    
    
    (11,547
    )
    
    
    (10,997
    )$
    16,084
    
    
    $
    16,409




---



##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 25 NOTE TEN: COMMITMENTS AND CONTINGENCIES The Company leases certain facilities under various operating leases. Most of
the lease agreements provide the Company with the option of renewing its lease
at the end of the initial lease term, at the fair rental value, for periods of
up to five years. In most cases, management expects that in the normal course
of business facility leases will be renewed or replaced by other leases. Minimum payments under these leases, exclusive of property taxes and insurance,
are as follows: 2005
    
    $
    9602006
    
    
    1722007 (no lease terms extend beyond 2007)
    
    
    102$
    1,234
 Rent expense was $1,194, $2,643, $2,698 in fiscal 2004, 2003, and 2002,
respectively. The Company is subject to legal proceedings and business disputes involving
ordinary and routine claims. The ultimate legal and financial liability with
respect to such matters cannot be estimated with certainty and requires the use
of estimates in recording liabilities for potential litigation settlements.
Estimates for losses from litigation are made after consultation with outside
counsel. If estimates of potential losses increase or the related facts and
circumstances change in the future, the Company may be required to record
either more or less litigation expense. It is managements opinion that none of
the open matters at May 31, 2004 will have a material adverse effect on the
Companys financial condition or results of operations. NOTE ELEVEN: STOCK OPTION PLANS The Company has Stock Option Plans (the Plans) that authorize the Board of
Directors to grant options for 4,030,420 shares of the Companys common stock,
of which 1,211,914 shares were available for future grants at May 31, 2004. The
Plans provide for both incentive stock options, which may be granted only to
employees, and non-statutory stock options, which may be granted to directors
and consultants who are not employees. Pursuant to the Plans, options have been
granted to directors, officers and key employees at prices not less than 100%
of the fair market value on the day of grant. Options are exercisable at
various dates over a five-year or ten-year period from the date of grant. The
Plans provide for a variety of vesting dates with the majority of the options
vesting at a rate of one-third per year over a period of three years or
one-fourth per year over a period of four years from the date of grant. All
outstanding options expire at dates ranging from June 2005 to July 2010. On January 14, 2004 the Company paid a $99.5 million special distribution to
shareholders. As a result, the Board approved an adjustment to the exercise
price of all of our outstanding options to take effect on the close of business
on January 14, 2004. Consequently, 964,315 stock options with an average
exercise price of $11.95 were adjusted to 1,327,237 stock options with an
average exercise price of $8.48. In accordance with FIN 44, Accounting for
Certain Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25, there was no accounting consequence due to the changes made to
the exercise price or the number of shares other than future potential dilution
to shareholders because the aggregate intrinsic value of each award immediately
after the change was not greater than the aggregate intrinsic value of the
award immediately before the change and the ratio of the exercise price per
share to the market value per share was not reduced.




---



##### 



PAGE 26 ELECTRO RENT 2004 ANNUAL REPORT The following table summarizes certain information relative to options for
common stock. 2004
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOptions outstanding, beginning of year
    
    
    1,167,005
    
    
    $
    11.82
    
    
    
    783,269
    
    
    $
    12.15
    
    
    
    1,068,794
    
    
    $
    10.351/14/04 pre-adjustment options
    
    
    (964,315
    )
    
    
    11.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1/14/04 post-adjustment options
    
    
    1,327,237
    
    
    
    8.48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted at market price
    
    
    14,256
    
    
    
    7.42
    
    
    
    528,704
    
    
    
    11.27
    
    
    
    7,574
    
    
    
    16.44Exercised
    
    
    (185,097
    )
    
    
    10.84
    
    
    
    (46,281
    )
    
    
    5.22
    
    
    
    (276,361
    )
    
    
    5.31Cancelled
    
    
    (83,858
    )
    
    
    11.94
    
    
    
    (98,687
    )
    
    
    14.61
    
    
    
    (16,738
    )
    
    
    12.13Options outstanding, end of year
    
    
    1,275,228
    
    
    $
    8.47
    
    
    
    1,167,005
    
    
    $
    11.82
    
    
    
    783,269
    
    
    $
    12.15Options exercisable at end of year
    
    
    834,038
    
    
    $
    8.58
    
    
    
    580,055
    
    
    $
    12.34
    
    
    
    667,429
    
    
    $
    12.25
 The following summarizes information regarding stock options outstanding at May
31, 2004: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$1.89  $8.22
    
    
    203,123
    
    
    
    1.9
    
    
    $
    5.79
    
    
    
    194,179
    
    
    $
    5.74$8.23  $8.40
    
    
    561,308
    
    
    
    3.1
    
    
    
    8.22
    
    
    
    180,800
    
    
    
    8.22$8.41  $14.72
    
    
    510,797
    
    
    
    4.1
    
    
    
    9.82
    
    
    
    459,059
    
    
    
    9.931,275,228
    
    
    
    3.3
    
    
    $
    8.47
    
    
    
    834,038
    
    
    $
    8.58
 NOTE TWELVE: SAVINGS PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains a Savings Plan (401(k)) and a frozen Employee Stock
Ownership Plan (ESOP). Employees become eligible
to participate in the 401(k) after one year of employment. The Company has the
option to match contributions of participants at a
rate management determines each year. For participants with three or more years
of service, the Company also may elect to make
additional discretionary matching contributions in excess of the rate elected
for participants with less than three years of service. The Board of Directors determines the amount to be contributed annually to the
401(k) in cash, provided that such contributions
shall not exceed the amount deductible for federal income tax purposes. Cash
contributions to the 401(k) of $281, $335, and $441
were made for 2004, 2003, and 2002, respectively. The ESOP was established in 1975 and was frozen in 1994, at which time all
participants became fully vested. Contributions to the
ESOP were invested primarily in stock of the Company. The ESOP held 78,238
shares of the Companys stock and cash of $315 at
May 31, 2004. NOTE THIRTEEN: INSURANCE SETTLEMENT On July 22, 2003, the Company received a one-time insurance settlement of
$2,000 related to unrecoverable rental and lease
equipment written off in years prior to fiscal 2003. The insurance proceeds
were accrued as other income for the fiscal year ended
May 31, 2003.




---



##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 27 NOTE FOURTEEN: SUBSEQUENT EVENT On June 12, 2004, when all contingencies expired, the Company recognized as
other income $1,758 related to funds received
from a class action lawsuit. The Company, as a purchaser of certain products
under warranty, participated as a member of the
plaintiff class. NOTE FIFTEEN: SEGMENT REPORTING SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes annual and interim reporting
standards for an enterprises operating segments and related disclosures about
its products, services, geographic areas and
major customers. Under SFAS No. 131, the Companys operations are treated as
one operating segment. Although the Company has only one reportable segment, it has two groups of
similar products: test and measurement (T&M)
and computer-related (DP) equipment. The Companys equipment pool, based on
acquisition cost, comprised $193,029 of T&M
equipment and $46,720 of DP equipment at May 31, 2004, and $194,433 of T&M
equipment and $58,245 of DP equipment at
May 31, 2003. Revenues for these product groups were as follows for the fiscal year ended May
31: T&M
    
    DP
    
    Total2004Rentals and leases
    
    $
    50,461
    
    
    $
    19,807
    
    
    $
    70,268Sales of equipment and other Revenues
    
    
    21,608
    
    
    
    2,234
    
    
    
    23,842$
    72,069
    
    
    $
    22,041
    
    
    $
    94,1102003Rentals and leases
    
    $
    52,990
    
    
    $
    27,677
    
    
    $
    80,667Sales of equipment and other Revenues
    
    
    22,736
    
    
    
    5,393
    
    
    
    28,129$
    75,726
    
    
    $
    33,070
    
    
    $
    108,7962002Rentals and leases
    
    $
    71,546
    
    
    $
    43,764
    
    
    $
    115,310Sales of equipment and other Revenues
    
    
    23,954
    
    
    
    8,600
    
    
    
    32,554$
    95,500
    
    
    $
    52,364
    
    
    $
    147,864
 No single customer accounted for more than 10% of total revenues during fiscal
2004, 2003, and 2002. In addition, total foreign country customers and
operations accounted for less than 10% of the Companys revenues and long-lived
assets for the same periods.




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##### 



PAGE 28 ELECTRO RENT 2004 ANNUAL REPORT NOTE SIXTEEN: QUARTERLY INFORMATION (UNAUDITED) Quarterly information is as follows: Total
    
    Income (loss)
    
    Net
    
    Earnings (loss) per shareRevenues
    
    Before Taxes
    
    Income (loss)
    
    Basic
    
    DilutedFiscal Year 2004First Quarter
    
    $
    22,697
    
    
    $
    3,468
    
    
    $
    2,126
    
    
    $
    0.09
    
    
    $
    0.09Second Quarter
    
    
    24,161
    
    
    
    3,677
    
    
    
    2,661
    
    
    
    0.10
    
    
    
    0.10Third Quarter
    
    
    23,566
    
    
    
    5,352
    
    
    
    3,281
    
    
    
    0.13
    
    
    
    0.13Fourth Quarter
    
    
    23,686
    
    
    
    5,963
    
    
    
    3,916
    
    
    
    0.16
    
    
    
    0.16$
    94,110
    
    
    $
    18,460
    
    
    $
    11,984
    
    
    $
    0.48
    
    
    $
    0.48Fiscal Year 2003First Quarter
    
    $
    31,065
    
    
    $
    4,192
    
    
    $
    2,601
    
    
    $
    0.10
    
    
    $
    0.10Second Quarter
    
    
    28,770
    
    
    
    3,112
    
    
    
    1,930
    
    
    
    0.08
    
    
    
    0.08Third Quarter
    
    
    24,642
    
    
    
    1,383
    
    
    
    857
    
    
    
    0.04
    
    
    
    0.04Fourth Quarter
    
    
    24,31
    
    
    
    (32,997
    )(1)
    
    
    (20,374
    )(1)
    
    
    (0.82
    )(1)
    
    
    (0.82
    )(1)$
    108,796
    
    
    $
    (24,310
    )
    
    $
    (14,986
    )
    
    $
    (0.60
    )
    
    $
    (0.60
    )
   (1)
    
    Includes pre-tax loss on impairment of goodwill and other intangible assets
of $37.1 million and pre-tax income from an insurance settlement of $2.0
million. NOTE SEVENTEEN: RESTATEMENT During the fourth quarter of 2004, the Companys management determined that
current income taxes payable required revision.
Based on an analysis of the prior accounting, management concluded that the
income tax payable for the Company was overstated
by $1,506, and it was further determined that the overstatement occurred during
the year ended May 31, 2001. As a result,
retained earnings as of June 1, 2001, has been restated to decrease the
liability by $1,506 to properly state income taxes payable
at $3,422. The net impact of $1,506 on retained earnings is reflected as a
restatement to the June 1, 2001 balance of retained
earnings in the accompanying consolidated statements of shareholders equity,
as follows: Retained earnings as of June 1, 2001, as
previously reported
    
    $
    238,404Prior period adjustment to revise income taxes
payable
    
    
    1,506Retained earnings as of June 1, 2001, as
restated
    
    $
    239,910
 Retained earnings and income taxes payable in the accompanying consolidated
balance sheet at May 31, 2003 have been modified
from the amounts previously reported to reflect the 2001 restatement.
Additionally, retained earnings at May 31, 2003, 2002
and 2001 have been restated in the statements of shareholders equity to
reflect the changes.




---



##### 



ELECTRO RENT 2004 ANNUAL REPORT PAGE 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ELECTRO RENT CORPORATION Van Nuys, California We have audited the accompanying consolidated balance sheets of Electro Rent
Corporation and subsidiaries (the Company)
as of May 31, 2004 and 2003, and the related consolidated statements of income,
shareholders equity, and cash flows for each
of the three years in the period ended May 31, 2004. These financial statements
are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable
basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the
Company as of May 31, 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the
period ended May 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. As discussed in Note 3 to the consolidated financial statements, in the fiscal
year ended May 31, 2002, the Company changed its
method of accounting for goodwill and other intangibles to conform to Statement
of Financial Accounting Standards No. 142,
resulting in the discontinuation of amortization of goodwill during the fiscal
year ended May 31, 2002 As discussed in Note 17 to the consolidated financial statements, consolidated
retained earnings as of June 1, 2001, has
been restated. (DELOITTE & TOUCHE LLP SIGNATURE) Los Angeles, California
July 28, 2004




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PAGE 30 ELECTRO RENT 2004 ANNUAL REPORT CORPORATE INFORMATION BOARD OF DIRECTORS
    
    CORPORATE OFFICERS
    
    
    
    CORPORATE OFFICESDaniel Greenberg
    
    Daniel Greenberg
    
    Thomas A. Curtin
    
    6060 Sepulveda BoulevardChairman of the Board and
    
    Chairman of the Board and
    
    Vice President
    
    Van Nuys, California 91411-2512Chief Executive Officer
    
    Chief Executive Officer
    
    
    
    Phone (818) 786-2525Ronald J. Deming
    
    Fax (818) 786-4354*Gerald D. Barrone
    
    Gary B. Phillips
    
    Vice PresidentRetired, former President and
    
    Senior Vice President
    
    
    
    TRANSFER AGENT & REGISTRARChief Operating Officer
    
    
    
    John HartCoast Federal Bank
    
    Craig R. Jones
    
    Vice President
    
    U.S. Stock Transfer CorporationVice President and
    
    
    
    Glendale, CaliforniaNancy Y. Bekavac
    
    Chief Financial Officer
    
    Peter M. ShapiroPresident
    
    
    
    Vice President
    
    NASDAQ LISTINGScripps College
    
    Steven MarkheimVice President and Secretary
    
    
    
    Common Stock -Karen J. Curtin
    
    Richard E. Bernosky
    
    
    
    OTC Symbol: ELRCPrincipal, Dulcinea Ventures;
    
    Vice Presidentformer Executive Vice President
    
    
    
    
    
    GENERAL COUNSELBank of America
    
    Craig R. Burgi
    
    
    
    Guth Christopher LLPVice President
    
    
    
    Los Angeles, California*Joseph J. KearnsPresident
    
    Dennis M. Clark
    
    
    
    INDEPENDENT AUDITORSKearns Associates
    
    Vice PresidentDeloitte & Touche LLP*S. Lee Kling
    
    
    
    
    
    Los Angeles, CaliforniaChairman of the BoardKling Rechter & Co.James S. PignatelliChairman, President andChief Executive OfficerUnisource Energy Corporation*Audit CommitteeCompensation Committee
 CAPITAL STOCK, SHAREHOLDERS AND CASH DIVIDEND INFORMATION (UNAUDITED) The common stock of the Company is quoted on NASDAQ under the symbol ELRC.
There were approximately 436 shareholders of
record at July 30, 2004. On January 14, 2004, the Company paid a special
distribution of $4.00 per outstanding common share,
which totaled $99,515,000. The record date for the special distribution was
December 16, 2003, and the ex-dividend date was
January 15, 2004. The following table sets forth, for the period shown, the
high and low closing sale prices in the NASDAQ
National Market System as reported by NASDAQ. Fiscal Year 2004
    
    Fiscal Year 2003High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    12.54
    
    
    $
    9.85
    
    
    $
    13.00
    
    
    $
    9.29Second Quarter
    
    
    14.98
    
    
    
    12.25
    
    
    
    12.51
    
    
    
    9.21Third Quarter
    
    
    14.32
    
    
    
    8.56
    
    
    
    13.56
    
    
    
    9.76Fourth Quarter
    
    
    11.00
    
    
    
    8.90
    
    
    
    11.07
    
    
    
    8.60